Railway Age,
January 1996

So You Want to Buy a Railroad

Take a look at the Monopoly board. The Pennsylvania and the B&O are gone. You can no longer take a ride on the Reading. All that's left is the Short Line. Do you want to buy it? Are you in a position to buy it? Can you make it work better once it once it's yours?

First off, the whole question of whether to buy or not buy a piece of track is a function of probable commercial success -- how well you can match the service offering to theshipper need and do it profitably. This article will review some of the recent trends and what it takes to have a shot at success in this rapidly changing environment.

Perhaps the most significant development is the sellers aren't necessarily hanging up FOR SALE signs. Instead, they seek out "natural" buyers -- those operating short lines in the area. Steve Eisenach of NS sums it up best: The operator with other nearby resources nearby can use existing power, crews, office staff, and management and add incrementally as required, while the standalone operator must recoup all costs from the one line. Because the risk of failure is less, a sale to a local operator will be more attractive to the Class I, who needs a solid business relationship with a healthy short line partner.

Class I carriers today more than ever look to their shortline partners to cooperate in joint efforts to improve inter-carrier productivity. The Class I will expect you take an aggressive role in meeting future service and equipment needs, and the commitment will have to be made up front. Are you prepared to do what it takes to reduce cycle times, maximize equipment utilization, and offer the scheduling flexibility that your shipper customer and your Class I partner count on? Will the property support the resources needed to do the job?

When evaluating your shipper base, beware the property captive to one or two customers or industries. And all shippers aren't created equal: look for strong publicly traded companies with dominant shares in their industries, and be cautious about the potential of the shipper hanging on by beating up its vendors. Think about what you'll do to replace the business you lose to attrition: it's been estimated a given line segment loses about nine percent of its traffic a year to a combination of factors, meaning ninety percent of the business base changes every ten years. Don't underestimate the importance of marketing: growing the top line grows profitability faster than cutting costs, a fact unfortunately overlooked by too many shortline operators. You just can't save your way to profitability, and those who have tried have failed and have left the scene. If the commercial considerations make the grade, it's time to look at how you'll run the railroad. The three essentials are track, locomotives, and creative people. First, you'll need class II track at least (for a refresher, see 49CFR Part 213). Moreover, and especially if you're running grain trains, you'll want to prepare for the inevitable 286,000 lb. cars; they'll take 100 lb. rail on good wood and rock as a very minimum. If you don't have it, buying relay rail of this type will cost you upwards of $150 a ton. At 200 tons a mile, major relays are not to be undertaken lightly. Think long and hard about a line with a major track project in its immediate future.

Basic, non-turbocharged, un-fancy four axle power in the 2,000 hp range is by far the power of choice. As EMD's Mike Smith points out, they're not making any more of it, and the supply is drying up. Class Is are now beginning to shed the second-generation dash-twos since the older GP sevens, nines, and 38s were cascaded out in earlier fleet realignments. The flip side is that if you have older power in good shape, hang on to it. Values are bound to escalate. Furthermore, shortlines increasingly stick to one make -- EMD -- for a couple of reasons. They need power for which both repair parts and people who can fix them are readily available. And for every brand of power you use, a separate inventory of repair parts must be kept on hand.

FRA-certified locomotive engineers and knowledgeable conductors are critical assets. You'll hear some short lines lamenting the loss of the engineers they trained to the lure of the Big Roads, but others seem to have no problem, and there's a reason: people seek out employers offering a fair wage, a chance for promotion, and a working relationship based on trust. You owe it to yourself to provide all three, and especially the last one. After all, you can't logically put a crew in charge of a million dollars worth of locomotive and other people's goods if you can't trust them literally to deliver the goods. The successful shortlines give their people the tools they need to do the job and get out of their way. If you can't do that, you've either got the wrong people or you're in the wrong business.

Finally, scrimping on one area will cost you dearly in the others. The road that cuts corners on locomotive fleet management, limps along on excepted track, or pays for niggling personnel practices with high turnover will see higher fuel, overtime and car hire costs. Worst of all, as costs cut here escalate costs there, service levels decline and the whole purpose of the enterprise -- creating customers through innovation and marketing -- suffers.

So, do you still want to buy the only railroad left on the Monopoly Board? If you do, your focus must be on the customer's requirements and the resources you'll need to keep the business. Rates are no longer the issue for shippers; controlling logistical cost is, and the vendor that does that best wins the business. John Sammon, Conrail's SVP for Core Services, pulls it all together in his mission statement. "The goal," he says, "is to be the low-cost service provider that is also easy to do business with." As shortline operators we can do no less.

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